It is not unusual to find that business lenders and business loan brokers are not as forward-looking about commercial mortgage difficulties as most borrowers would expect, and I have published another article about commercial lenders to bypass. The focus here is on some of the typical commercial loan difficulties often overlooked by commercial lenders and borrowers.
Unexpected business financing possibilities can result in severe complications with a business loan, and business borrowers should be prepared for these circumstances. There are many potential commercial mortgage loan obstacles to be evaded with prudent working capital management strategies. Business financing problems with a typical commercial loan are more numerous and serious than most business borrowers would think.
A few of these business financing problems will be unavoidable, but in most cases these commercial loan challenges can be met successfully. Business borrowers and their advisors will be better prepared to take appropriate and timely corrective working capital management action by properly anticipating these recurring commercial mortgage difficulties.
Avoidable Business Loan and Commercial Mortgage Scenario Number 1:
Sourcing/seasoning assets and seasoning of ownership
This particular commercial loan problem will not be relevant to all business borrowers. However, if it is relevant, commercial borrowers should seek out a lender without sourcing and seasoning requirements or limitations.
Many commercial lenders will request business borrowers to document the source of the down payment (sourcing). Commercial lenders sometimes require that funds for a commercial mortgage down payment be verified, often for a period of up to 12 months (seasoning). If a lender imposes a minimum time a commercial property must be owned in order to refinance, this indicates seasoning of ownership.
Avoidable Business Loan and Commercial Mortgage Scenario Number 2:
A borrower wants to use subordinated debt (a seller second or other secondary financing) in order to acquire a commercial property with a smaller down payment
Commercial mortgage lenders will often not permit subordinated debt. With a business loan from more flexible lenders, a business borrower will not encounter restrictions on the use of subordinate financing and will decrease the down payment required.
Avoidable Business Loan and Commercial Mortgage Scenario Number 3:
A business loan situation that requires long-term business financing
How long is a long-term commercial loan? Business lenders often consider three years as the maximum period before a balloon payment will be due for a commercial mortgage.
If that sounds like short-term business financing instead of long-term, there are business lenders that can arrange 30-year commercial mortgage loans. Longer-term business financing will often be the critical difference that facilitates a successful business investment because new business financing will not be required for many years and commercial loan payments will also be reduced.
Avoidable Business Loan and Commercial Mortgage Scenario Number 4:
Business loan recall provisions
Commercial loan recall covenants mean that the business lender can force the borrower to repay early by calling the loan before it would normally expire. This potential concern is not applicable to all borrowers since some business financing agreements will not allow a loan recall possibility.
Many traditional commercial lenders routinely place recall clauses in their commercial loan conditions. The terms which can cause a recall will vary but will commonly include periodic lender review of financials and credit history. Under these circumstances if prescribed levels of income and credit standards do not occur, then the lender will typically notify the commercial borrower that they must pay off the loan within a 30-90 day period.
Business Financing Recall Contingency Plans: With a commercial loan recall, borrowers will need to refinance with a lender quickly. Prudent borrowers will exclude lenders that require recall agreements when evaluating business loan refinancing options.
To avoid a potentially disastrous recall scenario for a commercial mortgage business loan, commercial borrowers would be wise to consider only commercial loans which do not have recall terms. For commercial borrowers who have recall provisions in their business financing agreement, it will be equally wise to consider refinancing their business loan before a recall occurs so that refinancing is accomplished according to the commercial borrower's timetable.
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